Global Math--Most auto mergers flop

Make one merger and they say everyone's going to be doing it. That's funny, because most of the recent cross-border consolidations in the auto industry flop. That's right. Flop.Let's look at the cross-border-deal scoreboard.General Motors-Saab. Rough guess: This has cost GM $2 billion minimum. Hey, do you think Saab will ever earn that $2 billion back? But worse, it's hard to figure the "why?" Why

Make one merger and they say everyone's going to be doing it. That's funny, because most of the recent cross-border consolidations in the auto industry flop. That's right. Flop.

Let's look at the cross-border-deal scoreboard.

General Motors-Saab. Rough guess: This has cost GM $2 billion minimum. Hey, do you think Saab will ever earn that $2 billion back? But worse, it's hard to figure the "why?" Why does GM own it? Even if Saab were to break even, or even make a buck, will its sales or profits ever be more than a pimple on GM's posterior?

Don't get me wrong. I like Saab. Nice cars. But what's in it for GM?

GM-Lotus. Remember when GM bought Lotus? I do. Ha-Ha.

Ford-Jaguar. For almost 10 years Ford has had Jaguar, and I figure Ford has $5 billion (at least) invested. Let's see, on a 15% return on capital, that's $750 million profit a year. When will that happen? Still, Jaguar could work out in the long run. We'll know in three more years.

Ford-Ace. Remember that acquisition? I do. Ha Ha. Ace was a sometimes sports car maker, but didn't make a single one under the Ford flag. For the money spent buying Ace, I could live quite comfortably for the rest of my life.

Renault-Volvo. The best thing about this one is that the Volvo team said "Hell no, we won't go," and broke it up. The first rainy day and the French would have shut the Swedish plants and moved production to France to keep their political unions quiet.

BMW-Rover. Well, it's costing BMW a pretty pfennig, probably hundreds of millions in losses annually. It may work in the end, we'll see.

VW-Skoda-SEAT. Skoda (of the Czech Republic) is a big investment but seems to be gaining momentum. SEAT (of Spain) was very sick but may be getting better. Of course, VW booted the CEO who bought them.

Get the idea? These deals don't work very often or they take a long time to prove themselves. For their cost, a company could have created a whole new brand and the factories, too. Ford bought Jaguar, Toyota created Lexus.

In plenty of merger/acquisitions, the major partner keeps his plants open, and his workers working, and when things get tough, he shuts the other guy's plants and fires his workers. And it's what makes the Chrysler/Daimler merger so interesting: This can't happen, since the vehicles don't match up.

I recall having tea one afternoon with old Mr. Toyoda, the former head of Toyota. There are nine companies making cars in Japan (counting Isuzu, which just builds trucks), and I said something like, "We've been talking about rationalizing the Japanese industry (meaning merging/buying) since I had hair on my head. When is it going to happen?"

And old Mr. Toyoda said something like, "Ah yes, you journalists are always telling us we should make fewer car companies. The only thing is, we don't want to." That was many years ago. There are still nine Japanese nameplates.

Journalists always want to merge smaller companies, like Volvo. The journalists figure a company Volvo's size can't survive. But there's no actual proof of that. They say that development costs (electronic systems, safety and emission controls) are too much. But suppliers provide this stuff.

Heck, Volvo beat GM with side air bags. Why? Volvo is willing to pay suppliers while GM wants to screw them.

And I would have rather owned Porsche stock the past few years than General Motors, or Toyota.

What about the theory of the balancing act, the necessity to be global so that when one market goes down the other may be up? That's like always betting your horse to "show;" you cover your money but you never win big. It seems to me that Chrysler, with most of its eggs in one basket, the U.S., does better profitwise than those global companies such as GM and Toyota.

Then some folks say that there will be only four or six or eight auto companies in the future? I say: "Only when there are six or eight airlines." Auto companies are airlines because countries consider them objects of prestige (and jobs and taxes) and don't like to see them go out of business.

Believe me, the last auto company in the world has not been created yet. Other small companies will grow large. Ever heard of AO GAZ, formerly Gorky Avtomobilny Zavod, maker of the Sobol minivan? GAZ just might be a big one some day.

Most of the folks who count auto companies don't count the companies in Russia, like GAZ, or in China. There will be independent auto giants in these countries some day. Does anyone really think that China will let foreigners, like GM or VW, own its auto industry? One day, when China is strong, the foreigners will get the boot. Count on it.

Most companies will do better by sharpening designs and improving products and productivity than by hunting global partners.

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